In our last episode (here) we noted how China’s steps to tighten liquidity had begun to weigh on its equities markets – and most notably the energy and materials sectors.
The question is whether the recent stalling in the copper price is reflective of this same effect:
Seems like a reasonable argument. Take for example this FT article (here) that Chinese copper imports are being re-exported into LME warehouses as Chinese traders can no longer finance inventories on the mainland. Estimates are that there are over 700,000 tonnes of metal sitting in bonded warehouses in China that would avoid the 17% value-added tax if it were to be re-cycled in this manner. This activity is consistent with a 43% drop in monthly copper imports to 192,161 tonnes in March compared to the same month last year (here).
According to the rules of the Silk Road, we could reasonably expect these flows to feed through to global markets. And looking at the most recent commitments of traders reports, it appears that this is indeed the case. Open interest has dropped since peaking in late January.
Looks like its been hedge funds that have begun to wind down longs – seen in the new format COT reports as money managers:
To place this chart in the longer term context, following is the old format report – copper longs remain elevated:
Whether this is signalling a slowdown in China demand for all things resources remains to be seen. It’s notable that electricity consumption is still growing at a healthy clip (here) – this bears further investigation.
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